A Priceless Gift for Teens and Young Adults: Smart Money Lessons for LifeSubmitted by HearthStone | Private Wealth Management on December 5th, 2015
December 5, 2015
A Priceless Gift for Teens and Young Adults:
Smart Money Lessons for Life
The holidays are a perfect time to reinforce smart money habits in teens and young adults. Far more than any tangible gift they may receive, instilling financial acumen in young people can impact their long term well-being and happiness for life. It also pays dividends to parents. As someone once observed, a parent is only as happy as their least happy child.
The following points can help guide parents and grandparents in upcoming discussions with their younger loved ones.
Point 1. Smart money habits begin with the basic principle of living within your means. Make a budget and stick to it. Separate spending items into three categories—needs, wants, and wishes. This will help prioritize spending and make it easier to decide where to cut back, if necessary.
When creating a budget, there is a commonly accepted guideline called the “50/30/20” rule. First, keep “needs” expenses, such as housing, groceries, utilities, phone, basic clothing and necessary travel, to 50% or less of total spending. Next, limit “wants” and “wishes” expenses, such as dining out, splurging on a new pair of shoes, and vacation travel, to 30%. Finally, set aside at least 20% for either paying down student loans and other debt, saving for the future, or both.
Point 2. Even though the sun may be shining, it’s important to save for a rainy day. Set aside an emergency fund in a savings account. You never know when you’ll need a major car repair or even worse, lose your job. Six months of “needs” would be an ideal amount. That should allow sufficient time to get back on your feet without having to go into credit card debt (or having to move back home with the parents).
Start by directing 10% of the budget, or half of the savings goal, to a savings account. Once you’ve reached the goal of having enough in your emergency fund, you can then direct that amount to longer-term savings such as your 401(k), IRA, or other retirement savings. Start saving for retirement early. It’s much harder to play catch-up later in life.
Point 3. Change the way you think about credit cards. Having a credit card is okay, but how you use it matters. I suggest you start calling it your “payment card,” not your credit card. This means that you will only use it to make purchases that you know you can pay off in full each month.
Understand how your credit score works. Your score can affect both access to credit and the cost of that credit. Easy access to credit through a credit card is a siren’s song that can lead to trouble and higher expenses later. Don’t fall for it.
Point 4. Think of yourself as a “free agent.” Research what the market is willing to pay someone like you in a job like yours. Make sure you’re getting paid what you’re worth. This means you have to be willing to negotiate your salary. And, like in the sports “free agency” market, it may mean that you’ll have to “change teams” in order to get the salary you deserve.
The “free agency” attitude is sometimes difficult. According to research cited in this blog, women find it to be more difficult than men. Most young adults are simply happy to have a job and aren’t willing to rock the boat by asking for a raise. But settling for less can have long-term negative effects on lifestyle and retirement. Considering the stakes, it’s worth it to adopt a free-agent attitude.
Conclusion. Teaching teens and young adults about money is more than an important process – it’s an act of love. It’s a gift that keeps on giving. The earlier in life they start making smart money decisions, the better equipped they will be to make wise money choices throughout their lives.
Teaching teens and young adults about money is more than an important process – it’s an act of love. It’s a gift that keeps on giving.